LGI Homes, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. LGI designs, builds, markets and sells homes, primarily to entry-level buyers, across multiple U.S. markets. Its five divisions are reported as one segment.
Financial and operating performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Home sales revenue | $630.2 million | $383.3 million |
| Home closings | 3,404 | 2,356 |
| Average selling price | $185,146 | $162,677 |
| Gross margin | $166.9 million; 26.5% | $102.8 million; 26.8% |
| Operating income | $79.7 million | $42.4 million |
| Net income | $52.8 million | $28.2 million |
| Diluted EPS | $2.44 | $1.33 |
| Adjusted EBITDA (non-GAAP) | $88.7 million; 14.1% margin | $48.4 million; 12.6% margin |
Revenue increased 64.4%, closings rose 44.5%, and average selling price increased 13.8%. Management attributed growth to more active communities, product mix and pricing, and 269 closings from the 2014 Oakmont acquisition. Gross margin percentage edged down as construction, lot and carrying costs increased; selling and general and administrative expenses declined as a percentage of revenue.
Fourth-quarter 2015 revenue was $176.8 million and net income was $15.7 million, versus $108.4 million and $7.5 million, respectively, in fourth-quarter 2014.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $37.6 million at year-end, versus $31.4 million in 2014. Net cash used in operating activities was $89.2 million, improved from $173.2 million used in 2014; real estate inventory remained a major use of cash. Investing activities used $1.1 million and financing activities provided $96.5 million.
- Real estate inventory was $531.2 million, up from $367.9 million; total assets were $622.3 million, liabilities $374.9 million and equity $247.4 million.
- Notes payable totaled $308.2 million carrying value: $230.0 million drawn on the revolving facility and $78.2 million carrying value on $85.0 million principal of 4.25% convertible notes due 2019. The revolver matures in May 2018 and bore interest at 3.50% at year-end. A 100-basis-point rate increase was estimated to raise annual interest expense by about $2.3 million.
- At December 31, the $255.0 million revolver had $21.6 million available after borrowings and letter-of-credit usage; availability increased with the facility’s expansion to $300.0 million in January 2016. The company reported covenant compliance and stated it expected to fund foreseeable liquidity needs for at least 12 months.
- Land option and purchase contracts covered 6,318 lots with an aggregate purchase price of $155.5 million and $6.4 million in deposits. Outstanding letters of credit, surety bonds and guarantees totaled $20.8 million. These amounts are not equivalent to funded debt.
Material changes, outlook and risks
- Active communities increased to 52 from 39, and owned or controlled lots grew to 23,915 from 19,883. Texas accounted for 55.6% of 2015 home sales revenue; the Northwest division had startup activity and no revenue.
- Backlog rose to 523 homes valued at $102.6 million from 152 homes valued at $27.1 million. Net orders were 3,628; the cancellation rate was 27.2%, down from 31.3% in 2014. Deposits are generally $1,000 or less and may be refundable if financing is unavailable.
- Management planned to maintain an entry-level focus, add townhome products in select markets, and continue geographic expansion. Sales from Terrata and other higher-price-point or homesite products were expected to be less than 5% of 2016 closings. Nashville, Seattle and Colorado Springs were expected to open for sales in 2016.
- Key risks include mortgage availability and interest rates, affordability and housing-market cycles, land acquisition and development costs, inventory carrying costs and impairments, subcontractor and material availability, and geographic concentration—particularly in Texas. Regulation, environmental matters, severe weather, insurance availability, warranty claims and access to financing may also affect results.
- No real estate inventory impairment charges were recorded in 2015, 2014 or 2013. Oakmont-related earnout liability was estimated at $1.4 million at year-end, subject to actual closings through 2017. Management reported ordinary-course legal matters were not expected to have a material effect; it also disclosed uncapped environmental indemnities, no known environmental claims and no related reserves.
- The company issued 345,760 shares through its ATM program in 2015 for net proceeds of approximately $9.6 million. It did not intend to pay cash dividends for the foreseeable future. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor did not provide an opinion on internal control effectiveness.
Investor facts to verify
- Reconcile the reported cash balance and operating cash outflow with continued inventory and land investment, and assess liquidity under the revolver’s covenants and borrowing-base terms.
- Review the sustainability of growth and margins, especially as gross margin percentage declined and construction, lot and carrying costs rose.
- Track backlog conversion, cancellations, buyer financing qualification and the comparatively small, refundable customer deposits.
- Assess land commitments, lot inventory, completed homes and impairment sensitivity if absorption, pricing or market conditions weaken.
- Confirm the effect of the January 2016 revolver expansion, variable-rate exposure, convertible-note dilution or cash settlement terms, and future equity issuance.
- Evaluate the concentration of revenue in Texas and execution, startup costs and returns in newer markets and product lines.
Adjusted gross margin and Adjusted EBITDA are non-GAAP measures; the company cautions that they exclude costs with real economic effects and should be considered alongside GAAP results and cash flows.